Bali: now the rich must pay

The Bali summit on climate change, which starts next week, will seek to lay the foundations for a new global agreement on reducing the greenhouse gas emissions that cause rising temperatures and climate change. Ambitious targets for emission reduction must be at the heart of that agreement, together with effective market mechanisms that encourage emission trading between countries, rich and poor. The problem of climate change involves a fundamental failure of markets: those who damage others by emitting greenhouse gases generally do not pay. Climate change is a result of the greatest market failure the world has seen.

The evidence on the seriousness of the risks from inaction is now overwhelming. We risk damage on a scale larger than the two world wars of the past century. The problem is global and the response must be collaboration on a global scale. The rich countries must lead the way in taking action. And in thinking about global action to reduce greenhouse gas emissions, we must invoke three basic criteria.

The first is effectiveness: the scale of the response must be commensurate with the challenge. This means setting a target for emission reduction that can keep the risks at acceptable levels.

The overall targets of 50% reductions in emissions by 2050 (relative to 1990) agreed at the G8 summit in Heiligendamm last June are essential if we are to have a reasonable chance of keeping temperature increases below 2C or 3C. While these targets involve strong action, they are not overambitious relative to the risk of failing to achieve them.

The second criterion is efficiency: we must keep down the costs of emission reduction, using prices or taxes wherever possible. Emission trading between countries must be a central part of the story. And helping poor countries cover their costs of emission reduction gives them an incentive to join a global deal.

Third, we should be concerned about equity. Our starting point is deeply inequitable with poor countries certain to be hit earliest and hardest by climate change. But rich countries are responsible for the bulk of past emissions: US emissions are currently more than 20 tonnes of CO2 equivalent per annum, Europe's are 10-15 tonnes, China's five or more tonnes, India's around one tonne, and most of Africa much less than one.

For a 50% reduction in global emissions by 2050, the world average per capita must drop from seven tonnes to two or three. Within these global targets, even a minimal view of equity demands that the rich countries' reductions should be at least 80% - either made directly or purchased. An 80% target for rich countries would bring equality of only the flow of current emissions - around the two to three tonnes per capita level. In fact, they will have consumed the big majority of the available space in the atmosphere.

Rich countries also need to provide funding for three more key elements of a global deal. First, there should be an international programme to combat deforestation, which contributes 15-20% of emissions. For $10bn-$15bn per year, half the deforestation could be stopped.

Second, there needs to be promotion of rapid technological advance to mitigate the effects of climate change. The development of technologies must be accelerated and methods found to promote their sharing. Carbon capture and storage for coal (CCS) is particularly urgent since coal-fired electric power is currently the dominant technology around the world, and emerging nations will be investing heavily in these technologies. For $5bn a year, it should be possible to create 30 commercial-scale coal-fired CCS stations within seven or eight years.

Finally, rich countries should honour their commitment to 0.7% of GDP in aid by 2015. This would yield increases in flows of $150bn-$200bn per year. The extra costs that developing countries face as a result of climate change are likely to be upwards of $80bn a year, and it is vital that extra resources are available. This proposed programme of action can be built if rich countries take a lead in Bali on their targets, the promotion of trading mechanisms and funding for deforestation and technology. With leadership and the right incentives, developing countries will join.

The building of the deal, and its enforcement, will come from the willing participation of countries driven by the understanding that action is vital. It will not be a wait-and-see game as in World Trade Organisation talks, where nothing is done until everything is settled.

The necessary commitments are increasingly being demonstrated by political action and elections around the world. A clear idea of where we are going as a world will make action at the individual, community and country level much easier and more coherent.

These commitments must, of course, be translated into action. There is a solution in our hands. It will not be easy to build. But the alternative is too destructive to accept. Bali is an opportunity to draw the outline of a common understanding, which will both guide action now and build towards the deal.

· Sir Nicholas Stern led the Stern review on climate change; today in London he is giving the Royal Economic Society public lecture on Climate Change, Ethics and the Economics of the Global Deal

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